IPO Concept
‘Public Offers for Sale’ (IPOs) are transactions that take place when an owner of a large volume of shares in a company wants to sell that block of shares. They are offers of an exceptional volume of shares, which, if carried out through ordinary stock market trading, could lead to an abrupt and significant drop in their price. For this reason, this sale is made in an orderly and regulated manner through an IPO.
Characteristics of an IPO
IPOs are not primary market operations (issues) because they are about selling already issued securities. IPOs are usually carried out motivated by two situations, mainly:
– OPV of unlisted shares, precisely as an introductory phase to their listing on the stock market. They are widely used in cases of privatization of public companies. Another very common case is that of the ‘public subscription offer’ (OPS). In this case, it is a primary market operation, since it is an offer of new shares – therefore it implies a capital increase – that the issuer carries out as a listing on the stock market.
– IPO of already listed shares. In this case, the majority shareholder disposes of part or all of the package of shares he had, and makes them available to the public.
In IPOs and OPS, although the price can be set freely by the offeror, a very strict and complex administrative process must be followed, which will be supervised by the CNMV. In any public offer, an ‘informative brochure’ must be made of said offer, which must be made freely available to interested parties, as well as its conditions must be published (For example: number of shares offered, nominal, terms, rights that these actions entail,…). In the IPO and OPS award processes, several offer tranches are often established. For example, one tranche may target small investors, another for national institutional investors, and another for foreign, generally institutional, investors. In each of the tranches, maximum and minimum limits can be set for the shares to be acquired.
Normally, in IPOs and OPS, the offeror contracts with financial intermediaries the insurance and placement of said offer. Once the subscription period is over, two situations can occur:
– That the requests exceed the total of values offered. In this case, the shares will have to be distributed among the applications, which will be done through a proration previously established in the information brochure of the offer.
– That the requests do not reach the total of values offered. In the event that the OPV or OPS is insured, it will be carried out by granting the titles requested by the investors, and the rest will go to the financial insurer. In the event that it is not insured, the carrying out or not of the OPV or OPS will be based on what is established in the information brochure.
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Xavier Puig. Doctor in Business Administration and Management and director of the Banking and Finance programs at UPF Barcelona School of Management.
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